Greenspan the Regulator, Born the Deregulator
By David Henderson
In his post yesterday, Arnold stated, “I want to know what his [Greenspan’s] great deregulatory accomplishments were.” He also sees Brooksley Born as “a typical bureaucratic empire-builder.”
Greenspan did deregulate something–more on that in a minute–but on the issue Arnold highlights, credit default swaps (CDSs), Alan Greenspan, Treasury Secretary Bob Rubin, and SEC chairman Arthur Levitt were the advocates of regulation and Brooksley Born, contrary to what Arnold writes, was the advocate of (relative) deregulation.
First, let’s deal briefly with what Greenspan deregulated. Here’s what Jeff Hummel and I wrote in November 2008:
Greenspan also helped deregulate the broader monetary aggregates: M2, MZM, and M3. The Depository Institutions Deregulation and Monetary Control Act of 1980 had begun phasing out interest-rate ceilings on deposits and modified reserve requirements in complex ways. Combined with subsequent administrative deregulation under Greenspan through January 1994, these changes left all the financial liabilities that M2 adds to M1–savings deposits, small time deposits, money market deposit accounts, and retail money market mutual fund shares–utterly free of reserve requirements and allowed banks to reclassify many M1 checking accounts as M2 savings deposits. M2 and the broader measures became quasi-deregulated aggregates with no legal link to the size of the monetary base.
If you download that article, check footnote 11 for details on the deregulation of reserve requirements.
But on CDSs, it was Greenspan, not Born, who was an advocate of regulation: he, with Levitt and Rubin, wanted to prevent an organized market from existing. He wanted to keep CDSs in the hands of the big boys and not let the hoi polloi play. Unfortunately, he succeeded. Less Antman tells the story in his article, “Too Big to Succeed.” Antman writes:
Despite the [Washington] Post’s portrayal, Born may actually have come the closest to advocating a free-market policy. Although she was never able to get far enough to develop her ideas in detail, as head of the CFTC she likely would have had the authority to regulate CDS contracts that were traded on public commodity futures markets. The three men opposing her prevented these contracts from being publicly traded at all. As a result, credit default swaps could only be traded privately, keeping this market in the hands of a relatively small group of big players whose subsequent missteps might have been prevented or their impact minimized by such public trading.
Antman goes on to note:
With only private trading permitted, the general public was effectively excluded. Furthermore, remember that private contracts must result from direct negotiations and that there is a prohibition on providing any public information about them that might be deemed advertising or general solicitation. This provided an overwhelming edge to the biggest players who traded them the most, as the high costs of contacting potential counterparties, negotiating contracts individually, and compiling private information created enormous economies of scale. Thus the federal government didn’t merely declare credit default swaps off-limits to the CFTC; it also effectively created a trading cartel for the largest banks, insurance companies, and hedge funds catering to wealthy investors.